Freeman Law | The Tax Court in Brief (July 6– July 10)

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Freeman Law | The Tax Court in Brief (July 6– July 10)

The Tax Court in Brief

Freeman Law’s “The Tax Court in Brief” covers every substantive Tax Court opinion, providing a weekly brief of its decisions in clear, concise prose.

For a link to our podcast covering the Tax Court in Brief, download here or check out other episodes of The Freeman Law Project.

 

The Week of July 6 – July 10, 2020

Simpson v. Comm’r, T.C. Memo. 2020-100 | July 7, 2020 | Buch, J. | Dkt. No. 427-17

Short SummaryMr. Simpson was an executive coach at Franklin Covey, which described itself as “the world leader in helping organizations achieve results that require lasting changes in human behavior.”  Mrs. Simpson was a teacher and school administrator at Ivy Hall Academy of Provo (Ivy Hall).  As a result of their respective employment with Franklin Covey and Ivy Hall, Mr. and Mrs. Simpson incurred expenses associated with their employment, such as travel, meals & entertainment, and similar expenses.

In addition to their employment, the Simpsons owed two businesses:  Simpson Executive Coaching (Simpson Coaching) (a C corporation) and eBusiness Advisory & Consulting Services (e-BACS) (a partnership).  The stated purpose of Simpson Coaching was to provide executive coaching services to mid- and small-sized businesses.  E-BACS was formed primarily to increase enrollment at, and drive revenue for, Ivy Hall, a non-profit school.

For their 2012, 2013, and 2014 tax years, the Simpsons filed joint returns and claimed deductions for unreimbursed partnership expenses.  They also claimed deductions for unreimbursed employee business expenses for 2014.  The IRS issued a notice of deficiency for the Simpsons’ 2012 through 2014 tax years, which disallowed the unreimbursed partnership expenses and unreimbursed employee business expenses.  After the Simpsons filed a petition with the Tax Court, the IRS filed an amended answer raising new matters and increasing the deficiencies.

Key Issue:  Whether the Simpsons:  (1) may deduct unreimbursed employee business expenses for 2014; and (2) may deduct unreimbursed partnership expenses for 2012, 2013, and 2014.

Primary Holdings

  • The Commissioner bears the burden of proof as to whether Mrs. Simpson may deduct unreimbursed employee business expenses for 2014. Thus, the Commissioner must show that Mrs. Simpson either was not entitled to deduct the expenses or cannot substantiate the expenses.  Given the burden of proof, Mrs. Simpson may deduct some of her unreimbursed employee business expenses (meals and entertainment and miscellaneous expenses) but not the others (vehicle and travel expenses).
  • Simpson may not deduct unreimbursed employee business expenses for 2014 because Franklin Covey had a policy whereby it reimbursed employee expenses. Moreover, Mr. Simpson may not deduct unreimbursed business expenses for Simpson Coaching because those expenses, if permitted, should have been deducted on the corporate return.
  • The Simpsons are not entitled to deduct the unreimbursed partnership expenses for 2012, 2013, and 2014 because e-BACS was not engaged in carrying on a trade or business. Rather, its primary purpose was to support Ivy Hall, a nonprofit school.

Key Points of Law:

  • The Tax Court has jurisdiction to review and redetermine the Commissioner’s determinations, as set forth in a notice of deficiency, if a taxpayer files a timely petition challenging those determinations. Section 6213(a).  But generally the Commissioner’s determinations in a notice of deficiency are presumed correct, and the taxpayer therefore bears the burden of proving otherwise.  Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).
  • There is an exception to the general rule that a taxpayer bears the burden of proof. Specifically, the Commissioner bears the burden as to “any new matter, increases in deficiency, and affirmative defenses, pleaded in the answer.”  Rule 142(a)(1).  Which party bears the burden of proof is relevant only in the event of an evidentiary tie or a failure of proof.  Vandenbosch v. Comm’r, T.C. Memo. 2016-29.
  • Because the Commissioner bears the burden of proof here on the issue of unreimbursed partnership expenses for 2012 and unreimbursed employee expenses for 2014, the Commissioner may meet his burden by showing that the Simpsons have failed to substantiate the expenses. Phillips v. Comm’r, T.C. Memo. 2013-215.
  • Section 162 allows taxpayers to deduct “ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business.” For the years at issue, this includes deductions for unreimbursed employee business expenses that are ordinary and necessary to the business of being an employee.  Cates v. Comm’r, T.C. Memo. 2017-178.
  • To deduct expenses under section 162, a taxpayer must be engaged in carrying on a trade or business. The Tax Court decides whether a taxpayer’s activities constitute carrying on a trade or business by looking at the facts and circumstances of the case.  Comm’r v. Groetzinger, 480 U.S. 23, 36 (1987).  In the Court of Appeals for the Tenth Circuit, the circuit to which an appeal of this case would lie, a taxpayer is engaged in a trade or business if “the taxpayer’s primary purpose and intention in engaging in the activity is to make a profit.”  Snyder v. U.S., 674 F.2d 1359, 1362 (10th 1982).
  • Generally, a nonprofit endeavor does not constitute a trade or business for the purpose of deducting expenses under section 162, even if the endeavor is engaged in by a for-profit entity. Iowa State Univ. of Sci. & Tech. v. U.S., 500 F.2d 508 (Ct. Cl. 1974); Synanon Church v. Comm’r, T.C. Memo. 1989-270.
  • The ordinary and necessary expenses incurred in the trade or business of being an employee are deductible under section 162. Lucas v. Comm’r, 79 T.C. 1, 6 (1982); Kurkjian v. Comm’r, 65 T.C. 862, 869 (1976).  An employee’s trade or business is earning compensation from the employer, and generally only those expenses that are related to the continuation of employment are deductible.  Noland v. Comm’r, 269 F.2d 108, 111 (4th 1959), aff’g T.C. Memo. 1958-60; Farias v. Comm’r, T.C. Memo. 2011-248.  When an employee has a right to reimbursement for expenditures related to his status as an employee but fails to claim reimbursement, the expenses are not necessary and are not deductible.  Orvis v. Comm’r, 788 F.2d 1406, 1408 (9th Cir. 1986), aff’g T.C. Memo. 1984-533.  An employee cannot fail to seek reimbursement and convert the employer’s expenses into the employee’s.  Kennelly v. Comm’r, 56 T.C. 936, 943 (1971), aff’d without published opinion, 456 F.2d 1335 (2d Cir. 1972).  The prohibition of a deduction for reimbursable expenses is a “bright line rule” and applies even when the employee is unaware that the expenses are reimbursable.  Orvis v. Comm’r, 788 F.2d at 1408.
  • Taxpayers must maintain sufficient records to establish their claimed deductions, retain these records for so long as the contents may become material, and keep these records available for inspection. Reg. § 1.6001-1(a); see also Section 6001.
  • Deductions for certain expenses are subject to strict substantiation rules under section 274(d). Sanford v. Comm’r, 50 T.C. 823, 826-829 (1968), aff’d per curiam, 412 F.2d 201 (2d Cir. 1969).  Such expenses include those relating to travel, meals and entertainment, gifts, and listed property under Section 280F(d)(4).  Section 274(d).  For the years in issue, listed property includes any passenger automobile, any other property used as a means of transportation, any property of a type generally used for purposes of entertainment, recreation, or amusement, computers, and any other property of a type specified by the Secretary by regulations.  Section 280F(d)(4).
  • To comply with the strict substantiation rules, the taxpayer must have adequate records or sufficient evidence corroborating the amount of the expense, the time and place the expense was incurred, the business purpose of the expense, and the business relationship of the taxpayer to any others benefitted by the expense. Section 274(d).  Adequate records require that the taxpayer maintain an account book, a log, a diary, or a similar record and documentary evidence to establish each element of an expenditure.  Treas. Reg. § 1.274-5T(c)(2)(i).
  • A taxpayer who decides to conduct a business in the corporate form may not personally deduct corporate expenses. Deputy v. du Pont, 308 U.S. 488, 494 (1940).  When a taxpayer adopts the corporate form, “so long as that purpose is the equivalent of business activity or is followed by the carrying on of business by the corporation, the corporation remains a separate taxable entity.”  Moline Props., Inc. v. Comm’r, 319 U.S. 436, 439 (1943).  “A taxpayer’s choice to adopt the corporate form requires the acceptance of its tax disadvantages.”  Rochlani v. Comm’r, T.C. Memo. 2015-174.  When a taxpayer tries to avoid the tax disadvantages of the corporate form, however, the “claim that his controlled corporation should be disregarded will be closely scrutinized.”  Strong v. Comm’r 66 T.C. 12, 24 (1976), aff’d without published opinion, 553 F.2d 94 (2d Cir. 1977).
  • Generally, for a taxpayer to deduct business expenses, the expenses must be those of that taxpayer, not the expenses of another taxpayer. Hudlow v. Comm’r, T.C. Memo. 1971-218.  A taxpayer who chooses to conduct a business in the corporate form is bound to that form.  And similarly, a partner generally cannot deduct expenses of a partnership directly on his income tax return.  See Cropland Chem. Corp. v. Comm’r, 75 T.C. 288, 295 (1980), aff’d without published opinion, 665 F.2d 1050 (7th 1981).  And finally, no deduction is permitted for personal, living, or family expenses.  Section 262(a).

Insight:  The Simpson case was an interesting one, particularly with respect to the Simpsons’ argument that they should be entitled to deduct expenses related to an entity they formed to drive revenue to a non-profit school.  Although they were not entitled to deductions under Section 162, the Simpsons may consider supporting the non-profit school in other ways, such as by making charitable contributions, which would potentially qualify for deduction under Section 170.


Seril v. Comm’r, T.C. Memo. 2020-101 | July 8, 2020 | Lauber, A. | Dkt. No. 4491-19 

Short SummaryPetitioner contested the IRS’ determination that a distribution from her retirement account was taxable, that she was liable under IRC §72(t) for the 10% additional tax on early distributions from the account, and that she was liable for an accuracy-related penalty under IRC §6662(a).  The Tax Court found in favor of the IRS, but held that Petitioner was not liable for the assessed accuracy-related penalty.

Key Issue:  Can a taxpayer who is not disabled and under the age of 59½ be taxed on distributions from a retirement account which were not used for education expenses or not rolled over into another eligible retirement account?

Primary Holdings

  • Distributions from a retirement account which are not rolled over into another eligible retirement account within 60 days are includable in gross income, unless the taxpayer can prove that he meets one of the exceptions for a waiver by the IRS.
  • Taxpayer must be able to substantiate that distributions from a retirement account were used for qualified higher education expenses in the year of distribution, and any amount from the distribution not used for such higher education expenses is taxable to the taxpayer.

Key Points of Law:

  • IRC § 408(d)(1) provides that, except as otherwise provided in this subsection, any amount paid or distributed out of an individual retirement plan shall be included in gross income by the payee or distributee. IRC §408(d) provides several exceptions to this rule–e.g., for rollover contributions, transfers incident to divorce, and distributions for charitable purposes.  See IRC §403(d)(3),(6),(8).
  • For a distribution to be excluded from gross income under the rollover exception, the funds must generally be deposited into an eligible retirement account no later than 60 days after the taxpayer receives the distribution. See IRC §408(d)(3)(A).
  • The IRS may waive the 60-day requirement where the failure to waive such requirement would be against equity or good conscience, including casualty, disaster, or other events beyond the reasonable control of the … taxpayer. SeeIRC §408(d)(3)(I).
  • In determining whether waiver is appropriate, the IRS considers all relevant factors including: (1) errors committed by a financial institution … ; (2) inability to complete a rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country or postal error; (3) the use of the amount distributed (for example, in the case of payment by check, whether the check was cashed); and (4) the time elapsed since the distribution occurred. See Proc. 2003-16, sec. 3.01, 2003-1 C.B. 359, modified by Rev. Proc. 2016-47, 2017 I.R.B. 346.
  • The Tax Court has applied the same factors in determining whether it would be against equity or good conscience to deny a waiver. See Trimmer v. Commissioner, 148 T.C. 334, 363 (2017) (addressing analogous hardship waiver under IRC §402(c)(3)(B)).
  • IRC §72(t)(1) states that if a taxpayer receives any amount from a qualified retirement plan, the taxpayer’s tax shall be increased by an amount equal to 10 percent of the portion of such amount which is includible in gross income.
  • An exception to IRC §72(t)(1) applies if the taxpayer receiving the distribution from the qualified retirement plan is over the age of 59½ or is disabled.  See IRC §72(t)(1)(A)(i),(iii).
  • Additionally, distributions to a taxpayer from an individual retirement plan to the extent such distributions do not exceed the qualified higher education expenses of the taxpayer for the taxable year are excepted as well. See IRC §72(t)(E).  Qualified higher education expenses include expenses tuition, fees, books, supplies, and (to some degree) room and board, and include expenses that a taxpayer incurs on behalf of a child. See IRC §§72(t)(7), 529(e)(3).
  • IRC §6662(a), (b)(2) imposes a 20% penalty upon the portion of any underpayment of tax that is attributable to (among other things) any substantial understatement of income tax. An understatement of income tax is “substantial” if it exceeds the greater of $5,000 or 10% of the tax required to be shown on the return. See IRC §6662(d)(1)(A).
  • IRC §6664(c)(1) provides that no accuracy-related penalty shall be imposed with respect to any portion of an underpayment if it is shown that there was a reasonable cause for such portion and that the taxpayer acted in good faith with respect to … it.
  • The decision whether a taxpayer has met this burden is made on a case-by-case basis, taking into account all pertinent facts and circumstances. Circumstances that may signal reasonable cause and good faith, include an honest misunderstanding of fact or law that is reasonable in light of all of the facts and circumstances, including the experience, knowledge, and education of the taxpayer.  See 26 CFR § 6664-4(b)(1).

InsightThe Seril case highlights certain tax issues that can befall a taxpayer who takes out early distributions from a retirement account.  Further it reinforces the need for strict compliance with applicable laws regarding early distributions to avoid unintended taxable income consequences.  It also demonstrates that a taxpayer considering early distributions from a retirement account should consult with a tax professional before taking a distribution.


Englewood Place, LLC v. Comm’r, T.C. Memo. 2020-105 | July 9, 2020 | Lauber, J. | Dkt. No. 1560-18

Short SummaryThe case involved charitable contribution deductions for conservation easements.

In December 2008 Englewood acquired, by contribution from HRH Investments, LLC (HRH), a 135-acre tract of land in Effingham County, Georgia. On July 29, 2011, Englewood donated a conservation easement over 130 acres of that tract to the Georgia Land Trust (GLT or grantee), a “qualified organization” for purposes of section 170(h)(3).

The easement deed recited the conservation purposes and generally prohibits commercial or residential development. But it reserves certain rights to Englewood as grantor, including the rights to conduct commercial agricultural and timber-harvesting activities within the conserved area.

The deed recognizes the possibility that the easement might be extinguished at some future date. In the event the Property were sold following judicial extinguishment of the easement, paragraph 17 of the deed provided that “[t]he amount of the proceeds to which Grantee shall be entitled, after the satisfaction of any and all prior claims, shall be determined, unless otherwise provided by Georgia law at the time, in accordance with the Proceeds paragraph.” Paragraph 19, captioned “Proceeds,” specified that the grantee’s share of any future proceeds would be determined:

by multiplying the fair market value of the Property unencumbered by this Conservation Easement (minus any increase in value after the date of this Conservation Easement attributable to improvements) by the ratio of the value of the Conservation Easement at the time of this conveyance to the value of the Property at the time of this conveyance without deduction for the value of the Conservation Easement.

Key Issues:  Whether the taxpayer is entitled to a charitable deduction for its grant of a conservation easement.

Primary Holdings: The Taxpayer is not entitled to a charitable deduction for the gran of the conservation easement.  The conservation purpose underlying the easement was not “protected in perpetuity” as required by section 170(h)(5)(A).

Englewood’s deed failed to satisfy the “protected in perpetuity” requirement for two reasons.

  • The regulatory fraction used in the deed to determine the grantee’s proportionate share of post-extinguishment proceeds is applied, not to the full sale proceeds–an amount presumably equivalent to the FMV of the Property at the time of sale–but to the proceeds “minus any increase in value after the date of this Conservation Easement attributable to improvements.” Thus, the grantee’s share is improperly reduced on account of (1) appreciation in the value of improvements existing when the easement was granted plus (2) the FMV of any improvements that the donor or its successors subsequently make to the Property. By reducing the grantee’s share in this way, the deed violates the regulatory requirement that the donee receive, in the event the Property is sold following extinguishment of the easement, a share of proceeds that is “at least equal to the proportionate value that the perpetual conservation restriction at the time of the gift, bears to the value of the property as a whole at that time.”
  • Because the grantee’s share of the proceeds is improperly reduced by carve-outs both for donor improvements and for claims against the donor, the deed’s judicial extinguishment provisions do not satisfy the regulatory requirements.

Key Points of Law:

  • The Code generally restricts a taxpayer’s charitable contribution deduction for the donation of “an interest in property which consists of less than the taxpayer’s entire interest in such property.” Sec. 170(f)(3)(A). But there is an exception for a “qualified conservation contribution.” Sec. 170(f)(3)(B)(iii), (h)(1).
  • For the donation of an easement to be a “qualified conservation contribution,” the conservation purpose must be “protected in perpetuity.” Sec. 170(h)(5)(A).
  • The regulations set forth detailed rules for determining whether this “protected in perpetuity” requirement is met.
  • The regulations recognize that “a subsequent unexpected change in the conditions surrounding the [donated] property * * * can make impossible or impractical the continued use of the property for conservation purposes.” Id. subdiv. (i). Despite that possibility, “the conservation purpose can nonetheless be treated as protected in perpetuity if the restrictions are extinguished by judicial proceeding” and the easement deed ensures that the charitable donee, following sale of the property, will receive a proportionate share of the proceeds and use those proceeds consistently with the conservation purposes underlying the original gift. Ibid. In effect, the “perpetuity” requirement is deemed satisfied because the sale proceeds replace the easement as an asset deployed by the donee “exclusively for conservation purposes.” Sec. 170(h)(5)(A).
  • Where a contribution of property (other than publicly traded securities) is valued in excess of $5,000, the taxpayer must “obtain[] a qualified appraisal of such property and attach[] to the return * * * such information regarding such property and such appraisal as the Secretary may require.” Sec. 170(f)(11)(C). The required information includes “an appraisal summary” that must be attached “to the return on which such deduction is first claimed for such contribution.” Deficit Reduction Act of 1984 (DEFRA), Pub. L. No. 98-369, sec. 155(a)(1)(B), 98 Stat. at 691; see sec. 1.170A-13(c)(2), Income Tax Regs. The IRS has pre- scribed Form 8283 to be used as the “appraisal summary.” Jorgenson v. Commissioner, T.C. Memo. 2000-38, 79 T.C.M. (CCH) 1444, 1450. Failure to comply with this requirement generally precludes a deduction.

InsightThe questions presented in this case are substantially identical to those previously decided adversely to the taxpayers in PBBM-Rose Hill, Ltd. v. Commissioner, 900 F.3d 193 (5th Cir. 2018); Oakbrook Land Holdings, LLC v. Commissioner, 154 T.C. __ (May 12, 2020); Coal Prop. Holdings, LLC v. Commissioner, 153 T.C. 126 (2019); Oakhill Woods, LLC v. Commissioner, T.C. Memo. 2020-24; and Belair Woods, LLC v. Commissioner, T.C. Memo. 2018-159.  The case illustrates the IRS’s continued focus on conservation easements.  The opinion was issued along with several other conservation-easement opinions on the same date based on substantially the same facts, reasoning, and legal authorities.


Dodson v. Comm’r, T.C. Memo. 2020-106 | July 9, 2020 | Lauber A. | Dkt. No. 7859-19L 

Short SummaryPetitioner sought review, pursuant to I.R.C. § 6330(d)(1), of the IRS determination that the taxpayer was not eligible to enter into an installment agreement.  The Tax Court held that the settlement office did not abuse her discretion in sustaining the proposed collection actions, as the taxpayer did not qualify for an installment agreement.

Key Issue:  Whether the settlement officer abused her discretion in determining that the taxpayer did not qualify for an installment agreement.

Primary Holdings

  • The taxpayers information provided on their Form 433-A (which was unsigned) and their supporting documents did not indicate that they qualified for an installment agreement, but indicated that they could pay the liability in full. The Tax Court held that settlement officer did not abuse her discretion in reaching this determination based on the stipulated facts presented.

Key Points of Law:

  • Section 6330(d)(1) does not prescribe the standard of review that the Tax Court should apply in reviewing an IRS administrative determination in a CDP case. Instead, the Tax Court applies precedent based on the whether the liability itself is at issue.
  • Where the validity of the underlying tax liability is at issue, the Commissioner’s determination is reviewed de novo. Otherwise, the Commissioner’s determination is reviewed for abuse of discretion.
  • Abuse of discretion exists when a determination is arbitrary, capricious, or without sound basis in fact or law.
  • A settlement officer’s decision to reject a taxpayer’s request for an installment agreement is reviewed for abuse of discretion.
  • In reviewing whether a settlement officer abused his/her discretion, the Tax Court considers: “(1) properly verified that the requirements of applicable law or administrative procedure have been met, (2) considered any relevant issues petitioners raised, and (3) considered ‘whether any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of * * * [petitioners] that any collection action be no more intrusive than necessary.’ See 6330(c)(3).”
  • In determining whether a taxpayer can apply for an installment agreement, Section 6159 authorizes the Commissioner to enter into an IA if he determines that it will facilitate full or partial collection of a taxpayer’s unpaid liability.
  • Subject to some exceptions, the decision to accept or reject an installment agreement lies within the Commissioner’s discretion.
  • The Tax Court will not subject its own judgment for that of the settlement officer, recalculate the taxpayer’s ability to pay, or independently determine what would be an acceptable offer.
  • In considering a taxpayer’s eligibility for an installment agreement, a settlement officer does not abuse his/her discretion by following guidelines set forth in the IRM.
  • The IRM provides that, in the absence of special circumstances such as old age, ill health, or economic hardship, a taxpayer must liquidate assets in order to qualify for an installment agreement. IRM pt. 5.14.1.4(5) (Sept. 19, 2014).

InsightThe Dodson case illustrates generally how the Tax Court reviews a settlement officer’s determination regarding an installment agreement.  The case provides an overview of the standards of review in play, but it also demonstrates the importance of reviewing a taxpayer’s financial information prior to submission to determine if a taxpayer may qualify for a collection alternative, or if the taxpayer may need to liquidate assets in order to pay the liability in full.  The Tax Court will rarely substitute its own judgment in place of the settlement officer’s determination.  Thus, it is important to ensure that all best efforts are made at the appeals level to secure a positive outcome for a taxpayer.


Maple Landing, LLC v. Comm’r, T.C. Memo. 2020-104 | July 9, 2020 | Lauber, J. | Dkt. No. 1996-18

Short SummaryThe case involved charitable contribution deductions for conservation easements.

In December 2008 Maple Landing acquired, by contribution from HRH Investments, LLC (HRH), a 293-acre tract of land in Effingham County, Georgia. On December 30, 2010, Maple Landing donated a conservation easement over 283 acres of that tract to the Georgia Land Trust (GLT or grantee), a “qualified organization for purposes of section 170(h)(3).

The easement deed recited the conservation purposes and generally prohibits commercial or residential development. But it reserves certain rights to Maple Landing as grantor, including the rights to conduct commercial agricultural and timber-harvesting activities within the conserved area.

The deed recognizes the possibility that the easement might be extinguished at some future date. In the event the Property were sold following judicial extinguishment of the easement, paragraph 17 of the deed provided that “[t]he amount of the proceeds to which Grantee shall be entitled, after the satisfaction of any and all prior claims, shall be determined, unless otherwise provided by Georgia law at the time, in accordance with the Proceeds paragraph.” (Neither party contends that Georgia law “otherwise provide[s].”) Paragraph 19, captioned “Proceeds,” specified that the grantee’s share of any future proceeds would be determined:

by multiplying the fair market value of the Property unencumbered by this Conservation Easement (minus any increase in value after the date of this Conservation Easement attributable to improvements) by the ratio of the value of the Conservation Easement at the time of this conveyance to the value of the Property at the time of this conveyance without deduction for the value of the Conservation Easement.

Key Issues:  Whether the taxpayer is entitled to a charitable deduction for its grant of a conservation easement.

Primary Holdings: Maple Landing’s deed fails to satisfy the “protected in perpetuity” requirement for two reasons.

  • The regulatory fraction used in the deed to determine the grantee’s proportionate share of post-extinguishment proceeds is applied, not to the full sale proceeds–an amount presumably equivalent to the FMV of the Property at the time of sale–but to the proceeds “minus any increase in value after the date of this Conservation Easement attributable to improvements.” Thus, the grantee’s share is improperly reduced on account of (1) appreciation in the value of improvements existing when the easement was granted plus (2) the FMV of any improvements that the donor or its successors subsequently make to the Property. By reducing the grantee’s share in this way, the deed violates the regulatory requirement that the donee receive, in the event the Property is sold following extinguishment of the easement, a share of proceeds that is “at least equal to the proportionate value that the perpetual conservation restriction at the time of the gift, bears to the value of the property as a whole at that time.” See sec. 1.170A-14(g)(6)(ii), Income Tax Regs.
  • Because the grantee’s share of the proceeds is improperly reduced by carve-outs both for donor improvements and for claims against the donor, the deed’s judicial extinguishment provisions do not satisfy the regulatory requirements.

Key Points of Law:

  • The Code generally restricts a taxpayer’s charitable contribution deduction for the donation of “an interest in property which consists of less than the taxpayer’s entire interest in such property.” Sec. 170(f)(3)(A). But there is an exception for a “qualified conservation contribution.” Sec. 170(f)(3)(B)(iii), (h)(1).
  • For the donation of an easement to be a “qualified conservation contribution,” the conservation purpose must be “protected in perpetuity.” Sec. 170(h)(5)(A).
  • The regulations set forth detailed rules for determining whether this “protected in perpetuity” requirement is met.
  • The regulations recognize that “a subsequent unexpected change in the conditions surrounding the [donated] property * * * can make impossible or impractical the continued use of the property for conservation purposes.” Id. subdiv. (i). Despite that possibility, “the conservation purpose can nonetheless be treated as protected in perpetuity if the restrictions are extinguished by judicial proceeding” and the easement deed ensures that the charitable donee, following sale of the property, will receive a proportionate share of the proceeds and use those proceeds consistently with the conservation purposes underlying the original gift. Ibid. In effect, the “perpetuity” requirement is deemed satisfied because the sale proceeds replace the easement as an asset deployed by the donee “exclusively for conservation purposes.” Sec. 170(h)(5)(A).
  • Where a contribution of property (other than publicly traded securities) is valued in excess of $5,000, the taxpayer must “obtain[] a qualified appraisal of such property and attach[] to the return * * * such information regarding such property and such appraisal as the Secretary may require.” Sec. 170(f)(11)(C). The required information includes “an appraisal summary” that must be attached “to the return on which such deduction is first claimed for such contribution.” Deficit Reduction Act of 1984 (DEFRA), Pub. L. No. 98-369, sec. 155(a)(1)(B), 98 Stat. at 691; see sec. 1.170A-13(c)(2), Income Tax Regs. The IRS has pre- scribed Form 8283 to be used as the “appraisal summary.” Jorgenson v. Commissioner, T.C. Memo. 2000-38, 79 T.C.M. (CCH) 1444, 1450. Failure to comply with this requirement generally precludes a deduction.

InsightThe questions presented in this case are substantially identical to those previously decided adversely to the taxpayers in PBBM-Rose Hill, Ltd. v. Commissioner, 900 F.3d 193 (5th Cir. 2018); Oakbrook Land Holdings, LLC v. Commissioner, 154 T.C. __ (May 12, 2020); Coal Prop. Holdings, LLC v. Commissioner, 153 T.C. 126 (2019); Oakhill Woods, LLC v. Commissioner, T.C. Memo. 2020-24; and Belair Woods, LLC v. Commissioner, T.C. Memo. 2018-159.  The case illustrates the IRS’s continued focus on conservation easements.  The opinion was issued along with several other conservation-easement opinions on the same date based on substantially the same facts, reasoning, and legal authorities.


Riverside Place, LLC v. Comm’r, T.C. Memo. 2020-103 | July 9, 2020 | Lauber, J. | Dkt. No. 2154-18

Short SummaryThe case involves charitable contribution deductions for conservation easements.

In December 2008 Riverside acquired, by contribution from HRH Investments, LLC (HRH), a 119-acre tract of land in Effingham County, Georgia. On December 30, 2009, slightly more than one year later, Riverside donated a conservation easement over 114 acres of that tract to the Georgia Land Trust (GLT or grantee), a “qualified organization” for purposes of section 170(h)(3).

The easement deed recites the conservation purposes and generally prohibits commercial or residential development. But it reserves certain rights to Riverside as grantor, including the rights to conduct commercial agricultural and timber- harvesting activities within the conserved area. Riverside also reserved the right to construct within the conserved area “a limited number of new improvements.”

The deed recognizes the possibility that the easement might be extinguished at some future date. In the event the Property were sold following judicial extinguishment of the easement, paragraph 17 of the deed provided that “[t]he amount of the proceeds to which Grantee shall be entitled, after the satisfaction of any and all prior claims, shall be determined, unless otherwise provided by Georgia law at the time, in accordance with the Proceeds paragraph.” (Neither party contends that Georgia law “otherwise provide[s].”) Paragraph 19, captioned “Proceeds,” specified that the grantee’s share of any future proceeds would be determined:

by multiplying the fair market value of the Property unencumbered by this Conservation Easement (minus any increase in value after the date of this Conservation Easement attributable to improvements) by the ratio of the value of the Conservation Easement at the time of this conveyance to the value of the Property at the time of this conveyance without deduction for the value of the Conservation Easement.

Key Issues:  Whether the taxpayer is entitled to a charitable deduction for its grant of a conservation easement.

Primary Holdings: The conservation purpose underlying the easement was not “protected in perpetuity” as required by section 170(h)(5)(A). For that reason the charitable contribution deduction claimed by Riverside is denied in its entirety.

Riverside’s deed fails to satisfy the “protected in perpetuity” requirement for two reasons.

  • The regulatory fraction used in the deed to determine the grantee’s proportionate share of post-extinguishment proceeds is applied, not to the full sale proceeds–an amount presumably equivalent to the FMV of the Property at the time of sale–but to the proceeds “minus any increase in value after the date of this Conservation Easement attributable to improvements.” Thus, the grantee’s share is improperly reduced on account of (1) appreciation in the value of improvements existing when the easement was granted plus (2) the FMV of any improvements that the donor or its successors subsequently make to the Property. By reducing the grantee’s share in this way, the deed violates the regulatory requirement that the donee receive, in the event the Property is sold following extinguishment of the easement, a share of proceeds that is “at least equal to the proportionate value that the perpetual conservation restriction at the time of the gift, bears to the value of the property as a whole at that time.” See sec. 1.170A-14(g)(6)(ii), Income Tax Regs.
  • Because the grantee’s share of the proceeds is improperly reduced by carve-outs both for donor improvements and for claims against the donor, the deed’s judicial extinguishment provisions do not satisfy the regulatory requirements.

Key Points of Law:

  • The Code generally restricts a taxpayer’s charitable contribution deduction for the donation of “an interest in property which consists of less than the taxpayer’s entire interest in such property.” Sec. 170(f)(3)(A). But there is an exception for a “qualified conservation contribution.” Sec. 170(f)(3)(B)(iii), (h)(1).
  • For the donation of an easement to be a “qualified conservation contribution,” the conservation purpose must be “protected in perpetuity.” Sec. 170(h)(5)(A).
  • The regulations set forth detailed rules for determining whether this “protected in perpetuity” requirement is met.
  • The regulations recognize that “a subsequent unexpected change in the conditions surrounding the [donated] property * * * can make impossible or impractical the continued use of the property for conservation purposes.” Id. subdiv. (i). Despite that possibility, “the conservation purpose can nonetheless be treated as protected in perpetuity if the restrictions are extinguished by judicial proceeding” and the easement deed ensures that the charitable donee, following sale of the property, will receive a proportionate share of the proceeds and use those proceeds consistently with the conservation purposes underlying the original gift. Ibid. In effect, the “perpetuity” requirement is deemed satisfied because the sale proceeds replace the easement as an asset deployed by the donee “exclusively for conservation purposes.” Sec. 170(h)(5)(A).
  • Where a contribution of property (other than publicly traded securities) is valued in excess of $5,000, the taxpayer must “obtain[] a qualified appraisal of such property and attach[] to the return * * * such information regarding such property and such appraisal as the Secretary may require.” Sec. 170(f)(11)(C). The required information includes “an appraisal summary” that must be attached “to the return on which such deduction is first claimed for such contribution.” Deficit Reduction Act of 1984 (DEFRA), Pub. L. No. 98-369, sec. 155(a)(1)(B), 98 Stat. at 691; see sec. 1.170A-13(c)(2), Income Tax Regs. The IRS has pre- scribed Form 8283 to be used as the “appraisal summary.” Jorgenson v. Commissioner, T.C. Memo. 2000-38, 79 T.C.M. (CCH) 1444, 1450. Failure to comply with this requirement generally precludes a deduction.

InsightThe questions presented in this case are substantially identical to those previously decided adversely to the taxpayers in PBBM-Rose Hill, Ltd. v. Commissioner, 900 F.3d 193 (5th Cir. 2018); Oakbrook Land Holdings, LLC v. Commissioner, 154 T.C. __ (May 12, 2020); Coal Prop. Holdings, LLC v. Commissioner, 153 T.C. 126 (2019); Oakhill Woods, LLC v. Commissioner, T.C. Memo. 2020-24; and Belair Woods, LLC v. Commissioner, T.C. Memo. 2018-159.  The case illustrates the IRS’s continued focus on conservation easements.  The opinion was issued along with several other conservation-easement opinions on the same date based on substantially the same facts, reasoning, and legal authorities.


Village at Effingham, LLC v. Comm’r, T.C. Memo. 2020-102 | July 9, 2020 | Lauber, J. | Dkt. No. 2426-18

Short SummaryThe case involves charitable contribution deductions for conservation easements.

In December 2008 Village acquired, apparently by contribution from HRH Investments, LLC (HRH), a 175-acre tract of land in Effingham County, Georgia. On December 28, 2010, Village donated a conservation easement over 165 acres of that tract to the Georgia Land Trust (GLT or grantee), a “qualified organization” for purposes of section 170(h)(3).

The deed recognizes the possibility that the easement might be extinguished at some future date. In the event the Property were sold following judicial extinguishment of the easement, paragraph 17 of the deed provided that “[t]he amount of the proceeds to which Grantee shall be entitled, after the satisfaction of any and all prior claims, shall be determined, unless otherwise provided by Georgia law at the time, in accordance with the Proceeds paragraph.” (Neither party contends that Georgia law “otherwise provide[s].”) Paragraph 19, captioned “Proceeds,” specified that the grantee’s share of any future proceeds would be determined:

by multiplying the fair market value of the Property unencumbered by this Conservation Easement (minus any increase in value after the date of this Conservation Easement attributable to improvements) by the ratio of the value of the Conservation Easement at the time of this conveyance to the value of the Property at the time of this conveyance without deduction for the value of the Conservation Easement.

Key Issues:  Whether the taxpayer is entitled to a charitable deduction for its grant of a conservation easement.

Primary Holdings: The conservation purpose underlying the easement was not “protected in perpetuity” as required by section 170(h)(5)(A). For that reason the charitable contribution deduction claimed by Village is denied in its entirety.

Key Points of Law:

  • The Code generally restricts a taxpayer’s charitable contribution deduction for the donation of “an interest in property which consists of less than the taxpayer’s entire interest in such property.” Sec. 170(f)(3)(A). But there is an exception for a “qualified conservation contribution.” Sec. 170(f)(3)(B)(iii), (h)(1).
  • For the donation of an easement to be a “qualified conservation contribution,” the conservation purpose must be “protected in perpetuity.” Sec. 170(h)(5)(A).
  • The regulations set forth detailed rules for determining whether this “protected in perpetuity” requirement is met.
  • The regulations recognize that “a subsequent unexpected change in the conditions surrounding the [donated] property * * * can make impossible or impractical the continued use of the property for conservation purposes.” Id. subdiv. (i). Despite that possibility, “the conservation purpose can nonetheless be treated as protected in perpetuity if the restrictions are extinguished by judicial proceeding” and the easement deed ensures that the charitable donee, following sale of the property, will receive a proportionate share of the proceeds and use those proceeds consistently with the conservation purposes underlying the original gift. Ibid. In effect, the “perpetuity” requirement is deemed satisfied because the sale proceeds replace the easement as an asset deployed by the donee “exclusively for conservation purposes.” Sec. 170(h)(5)(A).
  • Where a contribution of property (other than publicly traded securities) is valued in excess of $5,000, the taxpayer must “obtain[] a qualified appraisal of such property and attach[] to the return * * * such information regarding such property and such appraisal as the Secretary may require.” Sec. 170(f)(11)(C). The required information includes “an appraisal summary” that must be attached “to the return on which such deduction is first claimed for such contribution.” Deficit Reduction Act of 1984 (DEFRA), Pub. L. No. 98-369, sec. 155(a)(1)(B), 98 Stat. at 691; see sec. 1.170A-13(c)(2), Income Tax Regs. The IRS has pre- scribed Form 8283 to be used as the “appraisal summary.” Jorgenson v. Commissioner, T.C. Memo. 2000-38, 79 T.C.M. (CCH) 1444, 1450. Failure to comply with this requirement generally precludes a deduction.

InsightThe questions presented in this case are substantially identical to those previously decided adversely to the taxpayers in PBBM-Rose Hill, Ltd. v. Commissioner, 900 F.3d 193 (5th Cir. 2018); Oakbrook Land Holdings, LLC v. Commissioner, 154 T.C. __ (May 12, 2020); Coal Prop. Holdings, LLC v. Commissioner, 153 T.C. 126 (2019); Oakhill Woods, LLC v. Commissioner, T.C. Memo. 2020-24; and Belair Woods, LLC v. Commissioner, T.C. Memo. 2018-159. The case illustrates the IRS’s continued focus on conservation easements.  The opinion was issued along with several other conservation-easement opinions on the same date based on substantially the same facts, reasoning, and legal authorities.